Why not one tax rate for all?

April 21, 1982

Add up your income. Send 10.6 percent of it to Uncle Sam. Simple. What a relief it would be when April 15 rolls around year after year. And, if all individual American taxpayers made this easy calculation for 1983, the total would be the same as the Treasury Department expects from the horrendously complicated system in place now.

Treasury came up with the 10.6 percent figure in reply to a senatorial inquiry. The inquiry was part of a growing bipartisan congressional response to public demand for basic tax reform--beyond all the piecemeal revisions and paperwork clarifications now in the news.

What is the reform most often asked for? A straightforward, across-the-board, flat-rate income tax.

Recently a high-powered public/private tax forum resolved that the time for serious discussion of the flat-rate tax had arrived. The Treasury Department receives a steady flow of correspondence recommending the idea. Senator DeConcini has introduced a bill calling for a flat-rate tax, and his mail has been unanimously favorable. Senator Hatfield, sponsor of several previous tax reform bills, this time intends to specify the flat-rate route. Senator Hayakawa is among others considering such legislation. Consumer advocate Ralph Nader's tax analysts favor some form of flat rate also.

Obviously the political spectrum of concern is broad. This is worth noting, because the flat tax has often been dismissed in the past as somebody's hobby horse. No one doubts that it would still be difficult to get past members of Congress besieged by special interest groups and reluctant to abandon the power inherent in being able to grant and withhold tax breaks under the present system. But the degree of attention now is such as to call on citizens to inform themselves on the subject and let their representatives know of their conclusions. Here are some of the points to look into:

* What. The flat-rate tax is also known as the proportional-rate tax, since it would call for the same percentage or proportion of income at all levels. In its pure form there would be no exclusions from income and no deductions. If there were deductions the rate for all would have to be increased. For example, Treasury calculated that the 10.6 percent rate for 1983 would rise to 11.6 percent if social security income were excluded and a 20 percent charitable deduction allowed.

* Why. The present tax system has mushroomed far from the simple progressive income tax to pay for government services mandated in 1913. Many of its intricacies may have been meant for worthy purposes, but they have been subject to abuse and inequity.

One set of distortions has been caused by using tax subsidies for social purposes. It would be better for Congress to appropriate money for such uses, thus publicly keeping tabs on them, than to let the subsidies silently go on through the tax system.

Another set of distortions occurs in the private sector. Here business is tempted to make decisions more for tax reasons than productive commercial purposes. Time and talent are diverted from useful, profitmaking enterprise to getting more breaks from government. Individuals at the same time are tempted to shift income and seek losses through perfunctory second businesses or other means.

The flat tax would eliminate the incentives for such distortions.

In addition, it could restore a sense of equity between working people, often without the option of tax shelters, and the wealthier Americans who now often are seen as paying a smaller percentage in taxes. The flat rate would be less than the top tax rates, and thus could benefit many with high income. But it also could result in higher taxes for those who have excessively sheltered their income.

* How. This is where approaches differ and study is particularly needed. The best system would seem to be the one that preserves the most simplicity while remaining sufficiently progressive to maintain the spirit of America's essential approach to taxation on the basis of ability to pay.

Thus the goal should be to start with a clean slate, removing the whole accretion of deductions and exclusions. It is not hard to imagine the lobbying onslaught if the door were opened to deciding which breaks should be kept and which not.

And, as assumed in most flat-tax proposals, there should be some reasonable standard exemption or other accommodation to ability to pay. For example, the current discussion includes exemptions of as much as $10,000. If the flat rate were 10 percent, someone with an income of $11,000 would pay only 10 percent of but it would be on $90,000 and add up to $9,000.So there would be a progressive element. But the currently higher-bracket salary-earner would also benefit.

Senator Hatfield would propose, instead of the standard exemption, a $250 personal tax credit for each individual. Thus for a family of four with a $10, 000 income, the total credit of $1,000 would cancel a 10 percent flat tax. Ralph Nader's tax people would favor not a single flat rate but perhaps four different brackets with gradually higher flat rates--but again no deductions except a standard deduction. This might appear more of a progressive tax. But the additional brackets would sacrifice the simplicity that is a prime reason for overcoming all the difficulties associated with getting a flat rate passed. And taxpayers would be invited to shift income to lower brackets, as at present, through diverting it to children, for example.

Senator DeConcini would add the concept of taxing all income only once, nearest its source. Dividends, for instance, would not be taxed twice.

So even the simple, logical flat tax has ins and outs that must be scrutinized before passage. The good news is that the scrutiny has begun with new earnestness. Maybe it will come to the point of the public giving Congress a Reagan-like challenge. If you don't like the flat tax, give us a better alternative.